Kubin Company’s relevant range of production is 26,000 to 35,500 units. When it

Question

Kubin Company’s relevant range of production is 26,000 to 35,500 units. When it produces and sells 30,750 units, its average costs per unit are as follows: Amount per Unit Direct materials $ 8.60 Direct labor $ 5.60 Variable manufacturing overhead $ 3.10 Fixed manufacturing overhead $ 6.60 Fixed selling expense $ 5.10 Fixed administrative expense $ 4.10 Sales commissions $ 2.60 Variable administrative expense $ 2.10 Required: 1. If 26,000 units are produced and sold, what is the variable cost per unit produced and sold? 2. If 35,500 units are produced and sold, what is the variable cost per unit produced and sold? 3. If 26,000 units are produced and sold, what is the total amount of variable cost related to the units produced and sold? 4. If 35,500 units are produced and sold, what is the total amount of variable cost related to the units produced and sold? 5. If 26,000 units are produced, what is the average fixed manufacturing cost per unit produced? 6. If 35,500 units are produced, what is the average fixed manufacturing cost per unit produced? 7. If 26,000 units are produced, what is the total amount of fixed manufacturing overhead incurred to support this level of production? 8. If 35,500 units are produced, what is the total amount of fixed manufacturing overhead incurred to support this level of production?

Explanation / Answer

Workings:

Notes:

1. Fixed selling expenses and fixed administrative expenses are not considered as fixed manufacturing costs but period costs.

2. Variable cost per unit is constant and hence will be the same whether 30750 units, 26000 units or 35500 units are produced and sold. However, the total variable cost will change in proportion to the number of units produced and sold.

3. Total fixed costs will be constant upto 35500 units which is Kubin's upper end of its range of production. The total fixed manufacturing overhead costs are computed as 30750 x $6.60 = $202950 which will be constant. However, the per unit fixed costs will vary depending upon the volume of production. If production and sales is 26000 units, the per unit fixed cost will be higher at $7.81 ($202950 / 26000), while if it is 35500 units, the per unit fixed cost will be lower at $5.72 ($202950 / 35500) since the cost is spread over a larger number of units.

1 Variable cost per unit produced and sold: $22.00 2 Variable cost per unit produced and sold: $22.00 3 Total amount of variable cost: $572000 26000 units x $22 per unit = $572000 4 Total amount of variable cost: $781000 35500 units x $22 per unit = $781000 5 Average fixed manufacturing cost per unit: $7.81 Fixed manufacturing cost per unit = $6.60 Total fixed manufacturing cost = 30750 x $6.60 = $202950 Average fixed manufacturing cost per unit = $202950/26000 = $7.81 6 Average fixed manufacturing cost per unit: $5.72 Average fixed manufacturing cost per unit = $202950/35500 = $5.72 7 Total fixed manufacturing overhead: $202950 8 Total fixed manufacturing overhead: $202950

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